Structured finance is a financing technique whereby specific assets are placed in a trust, thereby isolating them from the bankruptcy risk of the entity that originated them. Structured finance is known to be a market in which all parties rely to a great extent on the ratings and rating announcements to understand the credit risks and sources of protection in structured securities (of which there are many types, asset-backed commercial paper (ABCP), asset-backed securities (ABS), mortgage-backed securities (MBS), collateralized bond obligation (CBO), collateralized loan obligation (CLO), collateralized debt obligation (CDO), structured investment vehicles (SIV), and derivatives products company (DPC), synthetic CLOS, CBOs of ABS, collectively “structured finance.”) Currently, the credit quality of securities issued in connection with structured financings are determined at closing by comparing the amount of enhancement in a given transaction relative to the estimated portfolio variability of losses over the effective life of the transaction. However, these ratings are rarely, if ever, updated to reflect actual experience. Accordingly, a method is desired for dynamically updating the credit rating of structured securities based on actual credit loss and other performance.
Structured financings are typically the result of the sale of receivables to a special purpose vehicle created solely for this purpose. Securities backed by the receivables in the pool (“asset pool”) are then issued. These are normally separated into one or more “tranches” or “classes”, each with its own characteristics and payment priorities. Having different payment priorities, the tranches accordingly have different risk profiles and payment expectations as a function of the potential delinquencies and defaults of the various receivables and other assets in the pool. The senior tranche usually has the lowest risk.